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Speaker 1: So since then you become something of the foremost. I

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Speaker 1: don't know about that, but I do. I do work

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Speaker 1: a lot in the e TF space. Of all the

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Speaker 1: E t F s out there, right, there's two thousand,

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Speaker 1: one hundred. Just give us a ballpark. How many do

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Speaker 1: you think you helped sort of birth through the legal

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Speaker 1: process to make it to market a number and then

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Speaker 1: an asset waiting. I had no idea. Um. For instance,

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Speaker 1: I helped the first eye shares, and there were forty

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Speaker 1: of them when we first did the eye shares. Okay,

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Speaker 1: so that's but I didn't billion, but I didn't represise

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Speaker 1: to fifty. We're already about the whole industry. What else mickcap, spider, diamonds, diamonds, gold,

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Speaker 1: all the all the pressures. Yeah, g l D pre shares. Um,

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Speaker 1: we're about already. Can we hit fifty? Let me think

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Speaker 1: I'm sure. I'm looking market vectors any schwab Vandguard Vanguard.

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Speaker 1: Oh jesus, okay, now we're this is trillions presents the

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Speaker 1: E t F story. I'm Joe Webber, editor of Bloomberg

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Speaker 1: Business Week. In the early two thousand's, after webs becomes

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Speaker 1: part of I Shares and it really begins to take off.

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Speaker 1: Innovation in the E t F space is inevitable, and

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Speaker 1: as you just heard from Kathleen Mariarty, she ushered in

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Speaker 1: many of these innovations in the form of new ETFs

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Speaker 1: which are still relevant today. Dave Nodded, longtime managing director

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Speaker 1: at et F dot Com, says that in terms of

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Speaker 1: et F history, spy definite innovation webs really more of

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Speaker 1: a mainstreaming of an existing innovation LQT. I think a

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Speaker 1: genuine innovation which prize opened the door. Bruce Levin is

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Speaker 1: a senior strategy advisor to a Story Advisors, but he

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Speaker 1: was running product development at I Shares when it first

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Speaker 1: launched fixed income ETFs, including what is considered to sort

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Speaker 1: of be the Spy of fixed income l q D,

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Speaker 1: the first corporate bond ETF. The bond market, of course,

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Speaker 1: is a whole another thing, because it's an intransparent market

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Speaker 1: where you don't have that ability just you know, put

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Speaker 1: in a picker and get a quote on a bond.

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Speaker 1: He said, this also took a while to get the

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Speaker 1: SEC on board with the product, but once we got

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Speaker 1: the SEC comfortable that not only was it going to work,

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Speaker 1: but we were actually going to provide a benefit to

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Speaker 1: the market by creating of security that was a reference

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Speaker 1: point for where these these things to trade. I think

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Speaker 1: they liked that idea, and I think it's been very

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Speaker 1: successful as a result, Levine said, like the sec investors

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Speaker 1: were slow to warm initially, he says it was only

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Speaker 1: the most sophisticated advisors who liked these fixed income products.

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Speaker 1: Like everything with ETFs, once people understood what they were

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Speaker 1: getting and they toe dipped, they ever went back. You know,

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Speaker 1: once you've thought and got comfortable with something like an LQD,

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Speaker 1: you're not going to try to assemble individual bonds on

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Speaker 1: fifty companies for a small amount of money, which is

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Speaker 1: never gonna do that not says l q D was

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Speaker 1: one of the most significant launches in et F history.

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Speaker 1: It's not like there was a huge leap of faith

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Speaker 1: required from a regulatory standpoint to launch l q D.

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Speaker 1: What was required was that same leap of faith from

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Speaker 1: the dealer community to be the other side of the trade.

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Speaker 1: There was no question that portfolio managers and institutions and

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Speaker 1: advisers would want to buy corporate bonds in a more

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Speaker 1: convenient package. Because buying corporate bonds was a pain in

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Speaker 1: the ass. So yeah, by all means, they were a

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Speaker 1: ton of demand for it. But getting the dealer community

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Speaker 1: to show up and do creation redemption, the ability to

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Speaker 1: do um cash and lou for part of the baskets

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Speaker 1: because some stuff might not trade well enough, all of

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Speaker 1: that stuff was really just a feat on the street,

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Speaker 1: you know, ground effort to make that happen, a little

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Speaker 1: bit like trying to get somebody elected who may not

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Speaker 1: be that well known. You had to go out and

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Speaker 1: knock on doors and get these dealers to understand that, yeah,

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Speaker 1: creation redemption was going to work in the bond market. Uh.

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Speaker 1: And that I think was what really opened up people's

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Speaker 1: eyes to what E T s could become. And another

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Speaker 1: significant launch in that early two thousand's was Vanguard's first

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Speaker 1: et F, the Vanguard Index Participation Receipts or VIPERS. I

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Speaker 1: think it was more psychologically significant and maybe almost spiritually

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Speaker 1: significant than it was from any markets perspective. Viper poisonous snake. This,

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Speaker 1: as you'll recall, is Vanguard founder Jack Bogel. In some ways,

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Speaker 1: Bogel played a significant role in the ETS creation by

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Speaker 1: giving Nate Most feedback when Most was first dreaming about

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Speaker 1: what would become spy. Spy was also priced to compete

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Speaker 1: with Vanguard expense ratio from the very beginning, but no that.

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Speaker 1: Bogel has remained an outspoken critic of ETFs ever since.

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Speaker 1: Well in e t F is just another form of

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Speaker 1: index fun, a sort of bastardized form for the one

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Speaker 1: of a better word. Bogel says it's hard to pinpoint

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Speaker 1: his reaction to VI first it was eighteen years ago,

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Speaker 1: but he says he could understand why it happened. So

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Speaker 1: there we are had to They looked at it, and

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Speaker 1: many looked at as a way to get into the

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Speaker 1: brokerage business, which I thought was not catastrophic. But you know,

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Speaker 1: our our original premise was build a better mousetrap in

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Speaker 1: the world, will beat a path your door, And all

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Speaker 1: of a sudden we were out there hunting money other work. Uh.

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Speaker 1: And so it didn't warm my heart. I don't refe

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Speaker 1: recall feeling bothered about him, and I even, to be

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Speaker 1: quite blunt about it, said, you know, I'd probably have

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Speaker 1: done it too. I think the real kicker for the

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Speaker 1: Vipers coming online was it signaled to individual investors and

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Speaker 1: to a growing class of Vanguard focused advisors that e

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Speaker 1: t F s were okay, and I think that that

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Speaker 1: sort of anointment by somebody as revered as Vanguard really

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Speaker 1: opened the door for a huge rush into these products

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Speaker 1: by core asset allocation advisors, which is really what drove

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Speaker 1: all the growth in the two thousand's. Soon after Vipers

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Speaker 1: comes to market, Power Shares launches in two thousand three,

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Speaker 1: and the power Shares brand is where we first get

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Speaker 1: the concept of smart beta ETFs in a big way.

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Speaker 1: Bruce Bond, who had previously been the head of marketing

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Speaker 1: at Nuvine, was leading the launch. Bond says he'd seen

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Speaker 1: all kinds of product packaging in the et F space

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Speaker 1: and he knew what the problems were for all the

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Speaker 1: different products, and that's when I started to say, Okay.

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Speaker 1: At the time, there were no active e t s

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Speaker 1: and I looked at it and I said, well, what

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Speaker 1: is an index? An index as a group of stocks

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Speaker 1: that track something, right, it doesn't matter what it is,

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Speaker 1: so um now it has there's certain requirements and index

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Speaker 1: has to have in order to be replicated by an

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Speaker 1: e t F. But at the time they were all benchmarks,

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Speaker 1: and you know, just static cap weighted or dollar weighted

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Speaker 1: or what you know. However, their waiting scheme was. But

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Speaker 1: we looked at it and said, well, why wouldn't we

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Speaker 1: create an index of stocks that are intelligently selected using

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Speaker 1: a quantitative methodology, and we will build an index out

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Speaker 1: of a stocks a rank stocks rather than just all stocks,

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Speaker 1: and we'll have it waited like the market, so it

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Speaker 1: will look like the market from awaiting exposure standpoint, but

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Speaker 1: we'll do that with quality securities rather than just all securities.

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Speaker 1: And that's when the intellidux was born. And that's a

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Speaker 1: really intelligent indexing or smart beta or whatever you want

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Speaker 1: to call it. That was the birth of that whole movement.

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Speaker 1: He says people really hadn't thought creatively about what an

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Speaker 1: index actually was. And he says it was hard getting

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Speaker 1: power Shares off the ground. So we had to convince

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Speaker 1: something an intelligent index, quantitatively derived was better, you know,

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Speaker 1: like an index with value. It was better than just

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Speaker 1: a benchmark that floated along out there. And then we

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Speaker 1: had to also convince them, you know, of who power

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Speaker 1: shares was, and what an e t F is, and

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Speaker 1: and y an e t F the structure is. We're

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Speaker 1: going through all this to get the value through it

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Speaker 1: from a tax standpoint and a cost an efficiency standpoint,

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Speaker 1: not exaust The power shares products are so important because

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Speaker 1: we first started seeing evangelism for smart beta et s

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Speaker 1: and the form of ROB are not a a sticker

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Speaker 1: pr F. I think PRF is notable because it brings

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Speaker 1: with it ROB or not even more so than whatever

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Speaker 1: it's doing in the method adology. And ROB are not

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Speaker 1: was and remains such an advocate of a smart data methodology.

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Speaker 1: All right there, raffy waiting scheme in there that we've

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Speaker 1: for the first time sort of had our are evangelists.

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Speaker 1: The person you could put on radio or person you

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Speaker 1: can put on television would sit there and talk about

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Speaker 1: smart beta, whether they were using that phrase or not.

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Speaker 1: Are not says. The term smart beta has been commandeered

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Speaker 1: by the industry to encompass practically anything, so smart beta

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Speaker 1: now spans a whole array of strategies, some of which

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Speaker 1: are smart, some of which are not at all smart,

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Speaker 1: some of which break the link with price and have

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Speaker 1: the structural rebalancing alpha of the original smart beta concepts,

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Speaker 1: and some of them chase fads, chase bubbles, and are

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Speaker 1: the antithesis of smart. But smart Beta has grown hand

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Speaker 1: in glove with the t F community because the e

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Speaker 1: t F community, well, fourteen years ago it was boring,

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Speaker 1: had a bunch of capuited indices. The only exciting thing

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Speaker 1: in that whole domain was sector funds. All right, well

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Speaker 1: that's not very interesting. And so once fundamental index was

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Speaker 1: adapted to e t S, the doors swung wide open

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Speaker 1: for a whole array of strategies. And I applaud the

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Speaker 1: product proliferation that's happened there. Why shouldn't investors have a

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Speaker 1: wide array of choices. So, after we have bonds and

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Speaker 1: smart Beta plus some major growth in the E t

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Speaker 1: F space, g l D is the next logical innovation,

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Speaker 1: Although the intellectual property to make it happen required yet

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Speaker 1: another leap of faith and yet another bunch of structural

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Speaker 1: shenanigans not exist. The people behind structuring g LD gold

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Speaker 1: really did have to invent the wheel. The way g

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Speaker 1: l D works from an investor's perspective is, hey, it's

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Speaker 1: just like everything else. You just buy it, you get

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Speaker 1: exposure to gold under the hood. It's doing all sorts

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Speaker 1: of stuff no other structure has ever had to do.

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Speaker 1: All it had to create a whole way of accounting

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Speaker 1: based on ounces. It was literally a whole new accounting

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Speaker 1: methodology that you could never get away within a traditional

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Speaker 1: Fortiact fund. They had to come up with a new

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Speaker 1: trust structure in order to make that happen. Um, they

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Speaker 1: had a whole another gap of creation redemption problems to solve.

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Speaker 1: And much like how l q D gave people access

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Speaker 1: to a very difficult to buy security corporate bonds, not

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Speaker 1: says g l D really opened up gold as an

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Speaker 1: asset class. Prior to that, the only people who really

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Speaker 1: thought about gold as a portfolio asset were either sort

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Speaker 1: of hedge funds that could afford to be, you know,

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Speaker 1: buying certificated golden large amounts where they could be afford

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Speaker 1: to be buying directly in the London volume market, UM,

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Speaker 1: central banks, uh, you know, maybe major corporate treasuries that

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Speaker 1: were trying to shelter money. But but it wasn't something

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Speaker 1: that the average investor thought of it as a portfolio acid.

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Speaker 1: If anything, you thought of it as sort of a

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Speaker 1: rainy day collectible that you literally stuck in a safe

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Speaker 1: in the basement. It got to a billion dollars in

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Speaker 1: three days. That's a record, As you know, it's that

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Speaker 1: I called the Joe DiMaggio hitting still the standing record

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Speaker 1: easily is it? You know what number two is? Can

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Speaker 1: you guess? Yeah? That's true? Nerd nerds him right there.

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Speaker 1: Hardly anybody knows that I thought m J might break it.

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Speaker 1: But the performance it was on Pace D and D

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Speaker 1: was like a week or two, two and a half months,

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Speaker 1: was it? Really? That's that's why it's the hitting streak.

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Speaker 1: Bob Tool says that gold really helped demonstrate the vehicle

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Speaker 1: use of the E t F. E t F s

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Speaker 1: are rappers, right, cases into which you put something. The

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Speaker 1: case is agnostic. What became wonderful about the case is

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Speaker 1: that we could put anything into it. It could hold

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Speaker 1: gold because you would deposit gold into it and you'd

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Speaker 1: have the shares. It would be a proxy for gold.

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Speaker 1: And then you became silver. And then we did currencies,

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Speaker 1: and we did all kinds of things. And part of

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Speaker 1: the reason for it is by doing all of this,

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Speaker 1: at the end of the game, if a person had

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Speaker 1: twenty dollars, they could have a real assid allocation model

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Speaker 1: as opposed to exposure to a couple of stocks. And

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Speaker 1: since the realization that these vehicles are so effective in

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Speaker 1: many spaces. Each have grown immensely over the past decade.

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Speaker 1: To give you a sense, they were at six and

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Speaker 1: two thousand eight and since then they've grown sixfold to

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Speaker 1: three point six trillion. This growth can provide a lot

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Speaker 1: of opportunity for investors, but it can also feel like

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Speaker 1: a lot are not. Likens it to being overwhelmed with

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Speaker 1: choices at the grocery store, but if you see too

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Speaker 1: much variety, your eyes started to start to glaze over

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Speaker 1: and you wonder what the heck am I going to buy.

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Speaker 1: We're in sort of that situation, and in ets today,

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Speaker 1: there are hundreds of smart bait e t s and

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Speaker 1: a lot of them aren't smart. A lot of them

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Speaker 1: are really pretty dumb ideas. We're looking at a world

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Speaker 1: in which change happens gradually. People don't en mass pick

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Speaker 1: up and move from one idea to another. Most of

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Speaker 1: the growth in a U M and mutual funds has

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Speaker 1: actually been on the e T S side, but most

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Speaker 1: of the assets are still on the mutual fund side.

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Speaker 1: These things change slowly, and just as the dinosaurs in

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Speaker 1: Jurassic Park were big and powerful, they eventually got wiped out.

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Speaker 1: The best new ideas will gain tractions slowly but surely,

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Speaker 1: and the worst of the old ideas will lose ground

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Speaker 1: slowly bit surely, but they'll still be powerful participants in

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Speaker 1: the market in the interim, and that interim will last

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Speaker 1: many years to come. I don't expect this to be

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Speaker 1: a sudden see change, but I do do expect the

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Speaker 1: evolution of recent years to continue. E t f s

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Speaker 1: are a powerful tool and an investors stool kit. So

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Speaker 1: where are et f s headed. Dave Nodding thinks the

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Speaker 1: natural evolution is towards traditional active management, like how companies

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Speaker 1: such as Fidelity or t row Price have skilled research

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Speaker 1: teams that pick et f for other people. I think

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Speaker 1: that's almost inevitable now. Whether those will be successful products

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Speaker 1: or not, I don't know. I give kudos to the

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Speaker 1: folks like David's advisors who really just come out and said,

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Speaker 1: you know what, traditional active we pick stocks better than

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Speaker 1: you do. Give us your money, and I admire the

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Speaker 1: hudsp of that, whether they end up being right or wrong.

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Speaker 1: I think what we're going to see is more um

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Speaker 1: whether we call them AI based funds, whether we call

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Speaker 1: them smart beta funds, you know, we're seeing more and

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Speaker 1: more of those strategies get launched and get some traction

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Speaker 1: on the AI e Q launched pretty recently, got decent

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Speaker 1: assets pretty much out of the gate couple a million bucks.

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Speaker 1: So there is an appetite for these smarter smart beta products.

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Speaker 1: I think will eventually abandon this moniker smart beta. I

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Speaker 1: don't know anybody that actually likes likes that phrase. So

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Speaker 1: we're going to just start calling these things quant active

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Speaker 1: or quant funds, which is frankly what they've been all along.

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Speaker 1: There are a lot of projections out there, not only

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Speaker 1: about how eces we used like not I just explain,

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Speaker 1: but also projections about how big these things can get.

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Speaker 1: We talked about projections p wcs like ten trillion in

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Speaker 1: five years, state streets twenty five trillion. Yeah, that's that's

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Speaker 1: even more aggressive than mine. I don't use the term aggressive,

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Speaker 1: I use it less sober. And then and then we

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Speaker 1: are thirty and thirty, which is thirty trillion. That's global.

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Speaker 1: Those are global. Let's let's go with the global number

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Speaker 1: we got. I forget what it is now, five and

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Speaker 1: a half or six trillion. Where's this headed? Like, how

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Speaker 1: far do you think the e t F can go?

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Speaker 1: Where it doesn't? Again? Sort of eat up too much. Well,

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Speaker 1: too much is a relative thing. I mean, you know

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Speaker 1: in the US right now, ETF zone about what six

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Speaker 1: percent of market cap, right, So could you double that

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Speaker 1: and still not substantially impact market structure? Yeah? Could you

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Speaker 1: quadruple that? Yeah? Right, So the idea that you can

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Speaker 1: go from five trillion to twenty trillion doesn't scare me

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Speaker 1: in the least, especially when we're talking about some of

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Speaker 1: those assets going into enormously large markets like sovereign bonds

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Speaker 1: and commodities and currencies and gold, right, and not everything

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Speaker 1: is a small cap equity fund, right, Not everything is

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Speaker 1: emerging market local currency debt. So these assets are going

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Speaker 1: to go into very large pools. And we're also to

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Speaker 1: market where issuance is growing faster than people talk about,

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Speaker 1: Like and you just think about the corporate bondspace where

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Speaker 1: everybody worries about the ETF is getting too big. Issuance

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Speaker 1: is doubled in the last nine years. They're total outstanding debt, right,

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Speaker 1: So you know, the e t F portion of that

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Speaker 1: hasn't grown by percentage basis at all. It's just the

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Speaker 1: fact that that there's just way more corporate debt out there.

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Speaker 1: And so assuming that we don't have some radical global

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Speaker 1: economic downturn that crushes asset values worldwide. Twenty trillion seems

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Speaker 1: like a completely reasonable number. You know, we can't know

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Speaker 1: if that growth will happen, But as my colleague Eric

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Speaker 1: Baltunas points out, Nate most would most definitely be surprised

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Speaker 1: if he were still alive. I don't think they think

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Speaker 1: there would be three trillion. I don't think they think

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Speaker 1: to be you know, six trillion worldwide. I don't think

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Speaker 1: they'd think they're being et f in Iceland. I don't

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Speaker 1: think they would think there'd be a t S tracking

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Speaker 1: the things they do. I think some of the things

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Speaker 1: E t S track would actually worry them, you know,

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Speaker 1: like Vick's futures. So you know, look, this industry has

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Speaker 1: just exploded, and just like any evolutionary line, those lines

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Speaker 1: run fast and they go into different places and it's interesting.

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Speaker 1: You know, see, if we don't get Bloom, I can

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Speaker 1: sort of just say what he told me. But you

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Speaker 1: know what his his really great quote was is we're

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Speaker 1: we're trying to make a great product, but it turned

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Speaker 1: into in an entire industry, or more simply, can you

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Speaker 1: imagine a world without the e t F any longer, No,

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Speaker 1: probably not never. Thanks for listening to the et F

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Speaker 1: Story until next time. You can find us on the

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Speaker 1: Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever

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Speaker 1: else you like to listen. The et F Story is

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Speaker 1: produced by Jordan's Bell, with some production help by Magnus Hendrickson.

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Speaker 1: Francesca Levy is the head of Bloomberg Podcast. In stating

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Speaker 1: the pilots and the triple Delusa and BA